Economy

In Liu of a final agreement

Does ‘phase one’ trade deal signal merely a truce in Sino-US relations?

Trade-Deal-w

No such thing as a free lunch – but which side conceded more?

Donald Trump was in his favourite place – the limelight – on Wednesday, when the TV networks were struggling to decide where to focus their attention first.

At the very same time that the House of Representatives was voting to send articles of impeachment against the American president to the Senate, Trump was taking centre-stage at the White House in his preferred news story of the day: a new trade deal with the Chinese that he described as “a major step for world peace”.

“This is a very important and remarkable occasion,” he told the assembled guests. “Together we are righting the wrongs of the past.”

The Chinese response to the signing of the so-called ‘phase one’ deal was much more cautious, with Liu He, the head of the country’s negotiating team, reading out a letter from Xi Jinping, the country’s president, applauding the “spirit” of the agreement and saying that he hoped the Americans would treat Chinese firms fairly.

Perhaps revealingly, Xi wasn’t the signatory to the agreement either, leaving that responsibility to Liu, also China’s vice premier and Xi’s special envoy to Washington.

In brief, the agreement outlines Chinese commitments to buying $200 billion in US goods over the next two years, with industrial manufacturers, energy producers and farmers the main beneficiaries. In exchange the Americans will cancel additional tariffs due to come into effect last December and halve levies on $120 billion more Chinese imports announced a few months before.

Is this really the ‘win-win’ moment that the two sides have tried to signal? What’s certainly true is that both have suffered significant damage to their economies as a result of the trade row, with the imposition of American tariffs curtailing investment levels and hitting business confidence hard in China. Exporters in the US have also been harmed, according to a study co-authored by researchers from the Federal Reserve, which blames tariffs on Chinese imports for a drop in sales from American manufacturers. Higher costs in the supply chain cut exports by about 2% for those goods exposed to tariffs on inputs, it noted, compared to exporters without the same exposure. The impact has been reaching deep into the US economy, with nearly a third of manufacturing firms paying tariffs on almost half of their purchases.

In that context, the deal counts as a success in scaling back the confrontational mood between both sides, following almost two years of increasing acrimony. The media has also been suggesting that Washington is making other efforts to bolster better ties, with proposals to reconvene a twice-yearly meeting with the Chinese initiated under George W Bush (his ‘strategic and economic dialogue’ was dropped early on in the Trump presidency). “In our view, the reinstating of regular dialogue that is more comprehensive, more consistent, and in depth will be helpful in anchoring the bilateral relationship, which over the past few years has swung wildly depending on the fate of the ‘trade deal’,” Qu Hongbin, HSBC’s Chief China Economist, observed.

In another announcement on Monday that was linked to this week’s deal, the US Treasury said that it would no longer be designating the Chinese as a currency manipulator because Beijing has made “enforceable commitments” not to devalue the yuan.

The news sent the yuan to a five-month high, although the response from the Chinese foreign ministry was more measured. “China has never been a currency manipulator and Washington’s latest conclusion is in line with the truth and international consensus,” insisted Geng Shuang, its spokesman, on the change in the American position.

“It just doesn’t get any bigger than this,” Trump had crowed in announcing the deal, but despite the step forward, the signing of the phase one agreement leaves a host of issues unresolved. Neither government will be satisfied with the outcome of the negotiations. American tariffs stay in place on $360 billion of Chinese goods, with retaliatory Chinese action on $100 billion in US products still in force as well. And although the Chinese have made commitments to protecting US intellectual property and calling a halt to forced technology transfer, Washington will be wary that similar promises have been made in the past.

Also missing from the agreement are stipulations for the formal legal changes from the Chinese that the Americans were said to be demanding when talks broke down last May, Bloomberg pointed out. US negotiators counter that Washington can still punish Beijing with tariffs or other measures within 90 days if US officials decide that promises have not been met, rather than relying on a slower-moving action through the World Trade Organisation. But comments from Robert Lighthizer, head of the American negotiating team, gave a slightly different perspective on the situation. “This deal will work if China wants it to work,” he told reporters.

Phase two of the negotiations will turn to these deeper disagreements, though when these talks will start and the form they will take is still unclear.

One of the main points of contention remains the global rules for industrial subsidies. This was making new headlines on the same day that the deal got signed this week, as Japan and the European Union joined the Americans to put more pressure on Beijing over the issue.

Meanwhile one of the key concerns on the Chinese side – restrictions on the sales of American components to Chinese tech firms – also looks like it will flare up again after reports that Washington will lower the level of US content going into foreign-made goods that permit it to decide who the finished tech product gets sold to. Under current regulations the government can intervene in sales of goods from other countries if US-made components make up more than a quarter of their value. But Reuters is reporting the drafting of new arrangements to lower the threshold on such foreign exports to a tiny 10% of the product’s value, as well as expanding the range of goods subject to official scrutiny. This could further constrict Chinese supply chains, impacting the likes of Huawei.

Disagreements like these will come up for discussion during the second phase of the negotiations, although progress towards a more substantive pact looks even more unlikely as the American presidential race starts to pick up pace. Trump has already said he won’t be dropping any more tariffs until the phase two talks are complete, because they give him negotiating leverage. But politically he will probably want to keep the levies in place until voters decide whether to re-elect him or not. Of course, anti-China sentiment could well resurface during campaign season as well, with the Democrats matching the Republicans in much of their approach to Sino-US relations.

Perhaps that’s another reason why China’s state media has been subdued in reporting the signing of the accord this week. Expectations of further progress were limited, with concerns that even the terms of the current agreement could run into trouble. “It is such a paradox that it makes many people worry: can a preliminary trade agreement, reached during a period when China-US strategic relations are clearly declining, really work?” asked an editorial in the Global Times.

The Wall Street Journal predicted too that the broader arguments and conflicts over tech will remain. “One thing the trade conflict has noticeably failed to accomplish is any serious commitment from Beijing to abandon its own state-led industrial policy. Instead, China’s leaders have received the message that the US doesn’t welcome its technological rise—and redoubled their determination to promote domestic champions,” it concluded.


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